Value of lease, value of leasehold estate

[Anonymous]

Scenario 1:
Client wants to buy farm of land, buildings and home. seller's family has a life estate in the home. I've valued the life estate.
do you subtract this value from the overall value of the farm, since the enjoyment of that portion of the site is not available to buyer until some day in the future?

Scenario 2:
income stream on leased tower on SFH. I've valued the income stream. Since no comparable has a similar situation, they are all inferior to the subject, (tower does not detract severely to the subject so it is not necessarily a wash between unsightly tower to income stream) And, lucky me, I have one comp that can see the tower that is the subject of this question. Thus plus adjustments to all comps for the absence of an income stream? The lease is expected to last into the far future. And the amount of the adjustment would be the estimated value of the income stream??

No known sales with similar circumstances, and since we don't have cell phone towers, I can't use any sales/leases of those configurations.

Thanks to all!!

 

[Tom Hildebrandt]

Frank

I am not certain that the "proper" answer is a mere subtraction of the calculated value of the income stream in either example. While in theory the value of the fractional parts are supposed to equal the fee estate, it usually does not work so clean in the real world. Certainly, by doing the math as you suggest you can establish a basis for a limit to the range in possible value, but it really is not the complete answer.

Some of the texts like Eatons book Real Estate Valuation in Litigation and Fischer/Martins Income Property Valuation have pretty good discussions on the "does, don'ts and msuggested methods.

Regards

Tom Hildebrandt GAA

If you do not have any market data to help, the best you can do is use your professional judgement,

 

[Restrain]

As to scenario 1, the value of the reversion of the home may be very low as very minimal upkeep and maintenance will be done. After all, they only have a life estate, not a property that they expect to sell one day. People don't want to put money in something that isn't theirs.

Remember, the value of the total is the value of the site plus the value of the reversion, which may well be less than the value of the subject less the value of the life estate.

Scenario 2: If you have no other comps, who's going to argue with you?! The approach seems reasonably sound and is often used in multiple use properties. Just write a large addendum supporting your stance.

Good luck.

 

[Austin]

Scanerio 1: I see the valuation of two different estates that should not be related unless the time frame is very short. I would value the life estate in the home separate and unrelated to the farm-land unless I have some reason to believe that it will change the highest and best use of the total package within a short period of time resulting in a much higher price. If you subtract the life estate value from the value of the farm-land it seems to me that your are taking an asset and double counting it as a liability compounding the error. For example, if the farm is worth $100,000, the life estate is worth $25,000, the total value is $125,000. If you subtract the life estate from the farm value you end up with a price estimate of $75,000, a $50,000 difference.

Scanerio: I think you are making the same mistake in this situation. You have a lease fee interest in the tower site and a fee simple interest in the home. You should add them together to derive a total value of two separate estates. If you have supporting data that the dwelling suffered some obsolescence due to the presence of the tower you could consider that, but more than likely it would be an asset. Again, if you do what you suggested, it seems to me that you are compounding and doubling your error. The value of the lease fee estate in the tower is clearly not the measure of obsolescence in the dwelling.
Don’t jump to conclusions about towers. A new subdivision was under development on the side of a mountain. I appraised the subdivision while it was under development. I drove down the new road and there was a 600-foot tower visible every time you looked up. This was a very high-end residential subdivision. This tower had strobe lights on it. I said, man that will never work. Five years later the subdivision is fully developed with the highest $ per square foot of dwelling in the county.